Trickle-down versus trickle-up economics

From the blog of Michael Pettis (the link to the full post is highlighted):

Does cutting taxes on the wealthy lead to greater growth?

“Policies that increase income inequality can in some cases lead to higher savings, higher investment, and greater long-term growth. But, in other cases, such policies either reduce growth and increase unemployment or force up the debt burden. What determines which of these outcomes takes place is whether or not savings are scarce and have constrained investment.”

To give you a better idea of the argument, here is his conclusion. Pettis’ post may debunk the shibboleths of both left and right, while providing scope for reconciliation:

“Trickle-down economics does indeed work, as does its opposite, trickle-up economics, depending on underlying conditions that are not hard to specify. The key is the relationship between desired investment and actual investment. When the former exceeds the latter, policies that increase income inequality will generally cause savings to rise and expenditures to shift from consumption to investment; this leads to higher future growth that will eventually more than compensate ordinary and poor households for the increase in income inequality.

When desired investment is broadly in line with actual investment, however, there is no trickle-down effect. Policies that increase income inequality must permanently lower growth in the long run, although, in the short run, lower growth can be postponed by an increase in the debt burden.

In advanced economies, like those of the United States and Europe, there is no savings constraint on desired investment, so income inequality can only result in higher debt or higher unemployment and slower growth. It is only in developing countries that income inequality may boost growth, although in countries that have pursued the Gerschenkron model of forcing up domestic savings, like China has, actual investment can substantially exceed desired investment. This makes the reduction of income inequality or the channeling of wealth from the state to ordinary and poor households an urgent matter.”

Ha-Joon Chang: Financial markets need to become less – not more – efficient

In this video Cambridge University’s Ha-Joon Chang argues that financial markets need to become less efficient in order to serve the real economy and fund productive investment, rather than fueling financial asset-price bubbles and speculation.

He also makes the case that society needs more ‘active economic citizens’, who can press politicians and other elites to fashion better economic policies, and more effectively hold them to account.

On Balance Sheet Recessions: the economics of Richard Koo

RichardKooRichard Koo is best known for his concept of a Balance Sheet Recession (BSR), which was defined briefly in yesterday’s post. Two of his books are highly recommended: The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession and The Escape from Balance Sheet Recession and the QE Trap.

They are not difficult reading. The basic idea of a BSR is outlined many times throughout, and his arguments are clear. He also employs plenty of empirical evidence mainly in the form of charts.

This post summarizes some of Koo’s main ideas from the two books, although it is by no means exhaustive. Continue reading

Michael Hudson on Balance Sheets

JisforJunkEconThe evolution of balance sheets are key to the economics of Hyman Minsky, who described an economy with a financial system as one of ‘interlocking balance sheets’. Similarly, Richard Koo, originator of the concept of a Balance Sheet Recession, has written much on its implications for government deficits during the crisis of 2008 and, before that, during Japan’s Great Recession, which led to two decades of economic stagnation.

Until recently, balance sheets tended to be ignored by the mainstream majority of economists. The revival of Minsky’s ideas, alongside the ideas of Koo and post-Keynesians such as Steve Keen and Wynne Godley, have perhaps begun to shift the tide. The work of Michael Pettis, another economist influenced by Minsky, also deserves to be more widely influential. Continue reading

What I am reading now: Trumponomics – Causes and Consequences

TrumponomicsThis tome (at about 500 pages), recently published by the World Economics Association, is my current summer reading! The WEA champions economic pluralism and aims to ‘increase the relevance, breadth and depth of economic thought’.

Most of the thinking covered by the book lies on the political left and centre left. Trumponomics, to quote reviewer Bob Jessop, demonstrates ‘the explanatory power of a pluralistic heterodox political economy and its contribution to the critique of power and domination in an increasingly authoritarian and financialized age.’

It covers everything from post-Keynesian and Marxist to feminist and development perspectives, so there is plenty of variety to keep the interested reader going.

I hope to review some of the book in a week or two. For those who want to explore some of the individual papers, they are available for free download in two parts here.

Are CEOs paid to excess?

A short but lively debate between right and left on executive pay. The Adam Smith Institute’s Sam Bowman and Professor Mariana Mazzucato of UCL argue over whether it has become excessive relative to the pay of the rest of the workforce.

The Adam Smith Institute is proudly neoliberal (formerly libertarian), while Mazzucato believes strongly in state industrial and technology policy, as well as in the benefits of ‘stakeholder capitalism‘ as opposed to shareholder capitalism.

The stakeholder approach aims to balance the interests of different groups affected by the operations of firms, from CEOs to trade unions and customers, via particular forms of corporate governance. The aim of such a framework is to achieve both greater efficiency and a more equitable society.

Understanding the ‘Three Balances’

This 14 minute animated video is a nice introduction to the Three Sectoral Financial Balances, which are an important part of macroeconomics, or the study of the economy as a whole. The dialogue sounds a little odd, but stick with it.

The video helps to dispel some myths about the desirability or otherwise of government budget deficits and surpluses, and how the associated money flows interact with the rest of the economy: the private sector (firms and households) and the foreign sector (the rest of the world).

In particular, the discussion outlines how the US government ran budget surpluses in the late 1990s, but also how this was more than offset by the private sector deficit, and the resultant accumulation of private debt, which ultimately proved unsustainable.

The post-Keynesian economist Wynne Godley, originator of the Three Balances approach, warned about this in 1999 here, and forecast a recession, accompanied by rising unemployment and government deficits, as these trends necessarily began to unwind over the medium term.